How One Firm Tracked an Oligarch and Billions in Fraud

A Fraud of Up to $10 Billion

In February 2009, Kazakh authorities accused Ablyazov of looting BTA Bank, removed him as chairman and seized control of the institution. Three months later, BTA retained Chris Hardman and Cary Kochberg of the firm then known as Lovells to investigate a “financial black hole.” Hardman believes that the fraud may run as high as $10 billion. To date, Hogan Lovells has obtained judgments for over $4 billion; realistically, it might recover at best half that sum. Among the fallen banker's far-flung holdings were a stake in a White Sea port near Murmansk, and a pair of $33 million English pieds-'-terre: a 100-acre Surrey estate with a helipad, and a house on Hampstead's “Billionaires Row” with at least seven Italian marble bathrooms.

Ablyazov, claiming that he was the victim of political persecution, fled Kazakhstan for his gilded cage in Hampstead. Its other amenities included a wood-paneled elevator climbing to a mosaic-tiled swimming pool, and easy access to the London Commercial Court, where he would be spending much of the next five years.

In August 2009, Hardman asked Justice Nigel Teare for an old-fashioned worldwide freezing order. In traditional English law, such an order could stop an alleged con man from selling his assets pending the court's adjudication of fraud. But, except for funds within Britain, it couldn't stop him from moving money out of the jurisdiction. To leash a sophisticated banker such as Ablyazov, such an order was useless.

Hardman's first innovation, in December 2009, was to persuade Teare to duplicate the effect of a domestic freezing order worldwide, and to lock down Ablyazov's identified assets country by country. If Ablyazov had funds in France, they would stay in France. Unless, of course, Ablyazov ignored the freezing order.

In the belief that Ablyazov was busy emptying the cupboard, Hardman went back to the judge in July 2010 and obtained the appointment of three professionals from KPMG to act as receivers, and to supervise Ablyazov's assets pending the judgment on fraud. At first the order covered 60-70 companies around the world. This was already ground-breaking for a prejudgment receivership under English law. “Previously the most we'd ever seen was two flats in London,” Hardman says.

Hundreds of Shell Companies

But Hardman believed that Ablyazov was operating on a vastly greater scale. Detectives from Diligence Inc. spotted one of Ablyazov's brothers-in-law, Salim Shalabaev, leaving Billionaires Row in a silver Lexus SUV ' and trailed him to a Big Yellow Self Storage warehouse in north London. Under court orders, a workman cut through the padlock on storage unit E2010. Inside, he found 25 boxes of papers, data tapes, and a hard drive including a spreadsheet listing hundreds of shell companies.

Everything Hogan Lovells discovered, it poured into new requests for receivership. Eventually, the court would place over 1,000 suspected Ablyazov companies in the hands of the three KPMG partners. “Nothing a fraction of that size has ever been done before,” says Hardman.

Hardman went to Chancery Court, and kept pushing the law. Under the Norwich Pharmacal doctrine, a third party that's involved in a fraud ' even if unwittingly ' has a duty to help the victim by providing information without telling the suspected fraudster. Fraud victims in English court commonly seek such orders against banks. Hardman's first step was to get a Norwich Pharmacal order against Ablyazov's corporate agents in offshore havens, and to ask who was instructing them. “That's been done before, but we did it on an industrial scale,” says Hardman. He discovered that Ablyazov's ever-shifting business empire was run by his other brother-in-law, Syrim Shalabaev, off his Yahoo e-mail accounts. It seemed like a dead end.

But in November 2010, Hardman went back to Chancery Court and got a Norwich Pharmacal order against the email provider, Yahoo Inc. This was a first. It enabled him to secretly follow Shalabaev's correspondence in close to real time (often with a two-day delay) for five months. “It was the nearest thing ever done to civil court-sanctioned email tapping,” says Hardman.

Reading Shalabaev's e-mails enabled Hogan Lovells to identify hundreds more suspect companies. Even more importantly, it revealed Ablyazov's modus operandi.

Dummy Yahoo Accounts

Hogan Lovells believed that Shalabaev flew around the world setting up dummy Yahoo accounts in the names of fictitious people he put forward as the ultimate owners of shell companies created in offshore havens. It seemed hopeless for Hogan Lovells to catch up, because it would take mere minutes to create more corporate obscurity. But tracking Shalabaev's IP login address to the hotel where he stayed let Hogan Lovells follow his patterns. It was impossible to get direct evidence tying the Kazakhs to these accounts. The next best thing was powerful circumstantial evidence ' and Yahoo supplied it. Shalabaev might log into an account in his own name at 10:15 a.m. At 10:19, one suspected straw man would log in from the same IP address. At 10:22, another followed. And so on for 15 straw men that morning. The men's identities were often purchased on the black market, and were backed up by suspiciously similar and amateurish bank references.

“We needed to show that Ablyazov was at the center,” says Hardman. “This exercise was the key to tearing down his facade. It led directly to his conviction and prison sentence.”

In May 2011, Hogan Lovells decided that it had gathered enough evidence. It pulled the plug on the Yahoo operation and asked Justice Teare for a “committal order” ' committing Ablyazov to prison.

At the three-week trial that December, Hardman was the main witness, for Hogan Lovells had compiled all the evidence. Syrim Shalabaev testified from several secret locations by video. Ablyazov testified in person: “I am the victim of a continuing oppressive and illegal scheme by the Kazakhstan authorities, the purpose of which is to expropriate my assets and to eliminate me as a political force.”

On cross-examination, lead BTA barrister Stephen Smith of Erskine Chambers ignored the victim rhetoric and focused on Ablyazov's patterns of financial transaction. “Those layers of complication were inserted in order to ensure that nobody could find their way back to you,” said Smith accusingly.

“No, Mr. Smith,” replied Ablyazov. “This is just the general principle of how the offshore structures operate.”

Teare was convinced only that this was how Ablyazov operated. Noting that there was still no direct proof that he owned the assets, Ablyazov protested that the court couldn't commit him to prison on the basis of circumstantial proof. The court ruled that it most certainly could.

On Feb. 16, 2012, Teare found Ablyazov guilty of contempt of court for failing to disclose assets in breach of the freezing order, giving false evidence under oath, and dissipating assets in breach of the freezing order. The judge imposed three concurrent prison terms of 22 months. Ablyazov skipped the hearing and went into hiding.

'Cynicism, Opportunism And Deviousness'

There was still the little matter of the $6 billion that BTA sought. Hardman asked for what the Brits call an “unless order,” which is something like a directed verdict. On the last day of February 2012, Teare ruled that ' unless Ablyazov handed himself in, and unless he disclosed his assets ' the court would strike out his defenses to BTA's main fraud claim. Ablyazov remained on the lam.

“It is difficult to imagine a party to commercial litigation who has acted with more cynicism, opportunism and deviousness toward court orders,” wrote Justice Maurice Kay in upholding the committal and unless orders on appeal. They became final when the UK Supreme Court declined review in February 2013. It was the first time that an unless order was used to require a contemnor to hand himself in and serve his prison sentence on pain of losing his right to defend the proceedings brought against him.

Ablyazov released a statement the next month through his current lawyers, at Addleshaw Goddard, in connection with a related ruling. Promising an appeal to the European Court of Human Rights, it stated that the judgment “was based on unproven assumptions” of fraud, and complained that the court “did not examine evidence to the contrary from Mr. Ablyazov.” (The ECHR has not yet ruled on the admissibility of Ablyazov's complaints.)

As the hearings continued, Hogan Lovell's investigators became interested in a newly divorced Ukrainian lawyer with a taste for high fashion named Olena Tyshchenko, who began appearing in London proceedings for Ablyazov.

They trailed her from Commercial Court to Gatwick Airport, and then on to the French Riviera. After landing she changed her outfit, and at 2:30 a.m. on July 22, 2013, drove to a luxury waterfront rental property near Cannes called the Villa Neptune. News accounts noted that Ablyazov was seen through the curtains placing lilies on the bed.

Nine days later, as the gates of the compound opened for the gardeners to exit, a dozen French police armed with machine guns stormed the villa with the support of a helicopter. Encountering no resistance, they arrested Ablyazov. (Russian police arrested Tyshchenko in September on charges of money laundering.)

Contempt is not extraditable in Britain, but Ablyazov is also wanted on criminal charges in Russia and the Ukraine, and those nations have asked France to extradite him. Hardman expects Ablyazov to be extradited this fall to Russia (where his assets were more extensive).

Ablyazov's French lawyers say it would offend human rights to extradite him to a nation that might render him to Kazakhstan, where he would be mistreated because of his history as a political dissident. Human Rights Watch, which deplored Kazakhstan's treatment of Ablyazov when he fell out of favor in 2002, echoes the concern. Hardman says it's a nonissue; Russia is obliged by treaty to honor France's wishes on rendition, and has always done so.

The London fraud specialist Sonia Tolaney calls the Ablyazov case “of great precedential value” ' and she speaks from personal experience. This summer, in the closely watched Deutsche Bank v. Sebastian Holdings , she cited the Kazakh case in asking a judge to require a fraud defendant to post 100% of the judgment amount ($243 million plus interest and fees) as a condition of appeal. As is often the case these days, the judge agreed.

Michael Goldhaber is Senior International Correspondent for The American Lawyer, an ALM sister publication of this newsletter. A version of this story originally appeared in that publication.

For five years, a team at international law firm Hogan Lovells tracked the wild financial peregrinations of a Kazakh oligarch suspected of running a $10 billion fraud. Mukhtar Ablyazov started by looting his bank and continued by creating a global network of shell companies to hide the proceeds. To end that run, the Hogan Lovells lawyers chased his henchmen across the world with derring-do of a James Bond movie. But this is more than a cloak-and-dagger story. In legal consequence, which is the metric that matters most, BTA v. Ablyazov earned The American Lawyer's Global Dispute of the Year grand prize on the merits.

More than 50 reported UK decisions in Ablyazov have carved out 26 entries in the White Book, the official compendium of English civil procedure. No other case has notched more than 10. The English Court of Appeal called it “extraordinary litigation on a large scale,” pursued with a vigor akin to “trench warfare.” A panel of 25 top London barristers, polled by Sonia Tolaney of 3 Verulam Buildings, called it the most ground-breaking recent case by common consensus.

In a nutshell, Tolaney says, Ablyazov stands for the notion that “English courts will show the needed flexibility to fashion remedies to catch the modern, evasive, and technologically able fraudster.” To catch a slippery Kazakh banker, Hogan Lovells sought and received remedies that were once unthinkable even in the United Kingdom. London was already a destination for fraud enforcement. The forecast for fraudsters just got decidedly dimmer.

A Fraud of Up to $10 Billion

In February 2009, Kazakh authorities accused Ablyazov of looting BTA Bank, removed him as chairman and seized control of the institution. Three months later, BTA retained Chris Hardman and Cary Kochberg of the firm then known as Lovells to investigate a “financial black hole.” Hardman believes that the fraud may run as high as $10 billion. To date, Hogan Lovells has obtained judgments for over $4 billion; realistically, it might recover at best half that sum. Among the fallen banker's far-flung holdings were a stake in a White Sea port near Murmansk, and a pair of $33 million English pieds-'-terre: a 100-acre Surrey estate with a helipad, and a house on Hampstead's “Billionaires Row” with at least seven Italian marble bathrooms.

Ablyazov, claiming that he was the victim of political persecution, fled Kazakhstan for his gilded cage in Hampstead. Its other amenities included a wood-paneled elevator climbing to a mosaic-tiled swimming pool, and easy access to the London Commercial Court, where he would be spending much of the next five years.

In August 2009, Hardman asked Justice Nigel Teare for an old-fashioned worldwide freezing order. In traditional English law, such an order could stop an alleged con man from selling his assets pending the court's adjudication of fraud. But, except for funds within Britain, it couldn't stop him from moving money out of the jurisdiction. To leash a sophisticated banker such as Ablyazov, such an order was useless.

Hardman's first innovation, in December 2009, was to persuade Teare to duplicate the effect of a domestic freezing order worldwide, and to lock down Ablyazov's identified assets country by country. If Ablyazov had funds in France, they would stay in France. Unless, of course, Ablyazov ignored the freezing order.

In the belief that Ablyazov was busy emptying the cupboard, Hardman went back to the judge in July 2010 and obtained the appointment of three professionals from KPMG to act as receivers, and to supervise Ablyazov's assets pending the judgment on fraud. At first the order covered 60-70 companies around the world. This was already ground-breaking for a prejudgment receivership under English law. “Previously the most we'd ever seen was two flats in London,” Hardman says.

Hundreds of Shell Companies

But Hardman believed that Ablyazov was operating on a vastly greater scale. Detectives from Diligence Inc. spotted one of Ablyazov's brothers-in-law, Salim Shalabaev, leaving Billionaires Row in a silver Lexus SUV ' and trailed him to a Big Yellow Self Storage warehouse in north London. Under court orders, a workman cut through the padlock on storage unit E2010. Inside, he found 25 boxes of papers, data tapes, and a hard drive including a spreadsheet listing hundreds of shell companies.

Everything Hogan Lovells discovered, it poured into new requests for receivership. Eventually, the court would place over 1,000 suspected Ablyazov companies in the hands of the three KPMG partners. “Nothing a fraction of that size has ever been done before,” says Hardman.

Hardman went to Chancery Court, and kept pushing the law. Under the Norwich Pharmacal doctrine, a third party that's involved in a fraud ' even if unwittingly ' has a duty to help the victim by providing information without telling the suspected fraudster. Fraud victims in English court commonly seek such orders against banks. Hardman's first step was to get a Norwich Pharmacal order against Ablyazov's corporate agents in offshore havens, and to ask who was instructing them. “That's been done before, but we did it on an industrial scale,” says Hardman. He discovered that Ablyazov's ever-shifting business empire was run by his other brother-in-law, Syrim Shalabaev, off his Yahoo e-mail accounts. It seemed like a dead end.

But in November 2010, Hardman went back to Chancery Court and got a Norwich Pharmacal order against the email provider, Yahoo Inc. This was a first. It enabled him to secretly follow Shalabaev's correspondence in close to real time (often with a two-day delay) for five months. “It was the nearest thing ever done to civil court-sanctioned email tapping,” says Hardman.

Reading Shalabaev's e-mails enabled Hogan Lovells to identify hundreds more suspect companies. Even more importantly, it revealed Ablyazov's modus operandi.

Dummy Yahoo Accounts

Hogan Lovells believed that Shalabaev flew around the world setting up dummy Yahoo accounts in the names of fictitious people he put forward as the ultimate owners of shell companies created in offshore havens. It seemed hopeless for Hogan Lovells to catch up, because it would take mere minutes to create more corporate obscurity. But tracking Shalabaev's IP login address to the hotel where he stayed let Hogan Lovells follow his patterns. It was impossible to get direct evidence tying the Kazakhs to these accounts. The next best thing was powerful circumstantial evidence ' and Yahoo supplied it. Shalabaev might log into an account in his own name at 10:15 a.m. At 10:19, one suspected straw man would log in from the same IP address. At 10:22, another followed. And so on for 15 straw men that morning. The men's identities were often purchased on the black market, and were backed up by suspiciously similar and amateurish bank references.

“We needed to show that Ablyazov was at the center,” says Hardman. “This exercise was the key to tearing down his facade. It led directly to his conviction and prison sentence.”

In May 2011, Hogan Lovells decided that it had gathered enough evidence. It pulled the plug on the Yahoo operation and asked Justice Teare for a “committal order” ' committing Ablyazov to prison.

At the three-week trial that December, Hardman was the main witness, for Hogan Lovells had compiled all the evidence. Syrim Shalabaev testified from several secret locations by video. Ablyazov testified in person: “I am the victim of a continuing oppressive and illegal scheme by the Kazakhstan authorities, the purpose of which is to expropriate my assets and to eliminate me as a political force.”

On cross-examination, lead BTA barrister Stephen Smith of Erskine Chambers ignored the victim rhetoric and focused on Ablyazov's patterns of financial transaction. “Those layers of complication were inserted in order to ensure that nobody could find their way back to you,” said Smith accusingly.

“No, Mr. Smith,” replied Ablyazov. “This is just the general principle of how the offshore structures operate.”

Teare was convinced only that this was how Ablyazov operated. Noting that there was still no direct proof that he owned the assets, Ablyazov protested that the court couldn't commit him to prison on the basis of circumstantial proof. The court ruled that it most certainly could.

On Feb. 16, 2012, Teare found Ablyazov guilty of contempt of court for failing to disclose assets in breach of the freezing order, giving false evidence under oath, and dissipating assets in breach of the freezing order. The judge imposed three concurrent prison terms of 22 months. Ablyazov skipped the hearing and went into hiding.

'Cynicism, Opportunism And Deviousness'

There was still the little matter of the $6 billion that BTA sought. Hardman asked for what the Brits call an “unless order,” which is something like a directed verdict. On the last day of February 2012, Teare ruled that ' unless Ablyazov handed himself in, and unless he disclosed his assets ' the court would strike out his defenses to BTA's main fraud claim. Ablyazov remained on the lam.

“It is difficult to imagine a party to commercial litigation who has acted with more cynicism, opportunism and deviousness toward court orders,” wrote Justice Maurice Kay in upholding the committal and unless orders on appeal. They became final when the UK Supreme Court declined review in February 2013. It was the first time that an unless order was used to require a contemnor to hand himself in and serve his prison sentence on pain of losing his right to defend the proceedings brought against him.

Ablyazov released a statement the next month through his current lawyers, at Addleshaw Goddard, in connection with a related ruling. Promising an appeal to the European Court of Human Rights, it stated that the judgment “was based on unproven assumptions” of fraud, and complained that the court “did not examine evidence to the contrary from Mr. Ablyazov.” (The ECHR has not yet ruled on the admissibility of Ablyazov's complaints.)

As the hearings continued, Hogan Lovell's investigators became interested in a newly divorced Ukrainian lawyer with a taste for high fashion named Olena Tyshchenko, who began appearing in London proceedings for Ablyazov.

They trailed her from Commercial Court to Gatwick Airport, and then on to the French Riviera. After landing she changed her outfit, and at 2:30 a.m. on July 22, 2013, drove to a luxury waterfront rental property near Cannes called the Villa Neptune. News accounts noted that Ablyazov was seen through the curtains placing lilies on the bed.

Nine days later, as the gates of the compound opened for the gardeners to exit, a dozen French police armed with machine guns stormed the villa with the support of a helicopter. Encountering no resistance, they arrested Ablyazov. (Russian police arrested Tyshchenko in September on charges of money laundering.)

Contempt is not extraditable in Britain, but Ablyazov is also wanted on criminal charges in Russia and the Ukraine, and those nations have asked France to extradite him. Hardman expects Ablyazov to be extradited this fall to Russia (where his assets were more extensive).

Ablyazov's French lawyers say it would offend human rights to extradite him to a nation that might render him to Kazakhstan, where he would be mistreated because of his history as a political dissident. Human Rights Watch, which deplored Kazakhstan's treatment of Ablyazov when he fell out of favor in 2002, echoes the concern. Hardman says it's a nonissue; Russia is obliged by treaty to honor France's wishes on rendition, and has always done so.

The London fraud specialist Sonia Tolaney calls the Ablyazov case “of great precedential value” ' and she speaks from personal experience. This summer, in the closely watched Deutsche Bank v. Sebastian Holdings , she cited the Kazakh case in asking a judge to require a fraud defendant to post 100% of the judgment amount ($243 million plus interest and fees) as a condition of appeal. As is often the case these days, the judge agreed.

Michael Goldhaber is Senior International Correspondent for The American Lawyer, an ALM sister publication of this newsletter. A version of this story originally appeared in that publication.